Fall 2014 Economic Integration Key learning points 1 Sourcing Strategy 2 Diversification Strategy 2 1
The role of Headquarters They must determine the overall strategic direction and structure of the firm identifying new business and prioritizing the allocation of resources They must decide the scope of operations by defining the extent of the firm s involvement must examine whether the firm is better off with more or less involvement They need to develop a basis for maintaining an overview of performance across all subsidiaries by continuously reviewing the overall performance of subsidiaries 3 Three key roles of parent company three roles of parent company global sourcing diversification managing global portfolio 4 2
Global Sourcing 5 What is sourcing? refers to the process by which multinational firms manage the flow of components and finished goods to serve domestic and international markets to take advantage of low production costs in certain countries or regions, or to take advantage of specific skills and technologies located abroad Multinational firm s global sourcing strategy may include vertical integration, outsourcing, or both 6 3
Global Sourcing Strategy method location type of sourcing sourcing intra-firm vertical integration outsourcing domestic foreign domestic foreign in-house sourcing from domestic subsidiaries in-house sourcing from subsidiaries abroad sourcing from domestic external suppliers sourcing from suppliers located abroad 7 Vertical Integration 8 4
What is vertical integration? It s the degree to which a firm owns its upstream suppliers and its downstream buyers is typified by one firm engaged in different parts of production e.g. growing raw materials manufacturing, transporting, marketing, and/or retailing in-house sourcing domestically when domestic cost of producing and distributing is lower than foreign producing cost, and/or the quality of the products cannot be guaranteed abroad 9 Trend in vertical integration During the 1960~1970s, most multinational firms such as IBM, GM carried out everything internally Since the 1980s, however, vertical integration may slow multinational firms down it s better for firms to outsource non-essential activities than do everything in-house As a article in the Wall Street Journal in 2009 noted, the high technology companies have come back to the vertical integration 10 5
Vertical Deals: recent major M&A Firm Target Date Motive Live Nation Ticketmaster Entertainment PepsiCo Pepsi Bottling Group 2010 Control event promotion and ticketing 2009 Control beverage distribution Oracle Sun Microsystems 2010 Integrate hardware and software GM Boeing Factories and a stake in Delphi Auto Vought Aircraft Industries factory 2009 Control over parts supply 2009 Control over manufacturing Apple P.A. Semi 2008 Customize chips for its devices Nucor SHV North America 2008 Access to raw material Arcelor Mittal London Mining Brazil 2008 Access to raw material 11 motives & disadvantages in VI 12 motives lack of local suppliers able to produce high-quality input when competencies needed at the different stages in the value chain are similar to cross-subsidize one stage of the value chain by another to squeeze out competitors to retain control over proprietary knowledge reduce uncertainties in demand and price to add value at different stages of the value chain disadvantages can t concentrate on certain core tasks it does best higher cost relative to firms with outsourcing strategy where barriers to exit are high, VI increases inflexibility 6
What is Outsourcing? refers to the contracting out of a business function -commonly one previously performed in-house-to an external provider typically, the function being outsourced is considered non-core to the business There are financial advantages that come from outsourcing Many large companies now outsource jobs such as call center services, e-mail services, and payroll These jobs are handled by separate companies that specialize in each service, and are often located overseas 13 14 Trend in outsourcing In the 70s~80s multinational firms outsourced primarily low-value work and labor-intensive activities to developing countries Nike outsourced its shoe-making activities to plants in Asia In the late 80s~early 90s, Western software industry stated outsourcing their activities to plants in India, Ireland, Taiwan, and South Korea by the mid-90s, the influence of internet, outsourcing ranging from basic research to financial analysis Cost-saving justification for international outsourcing has been moved gradually to quality and reliability in the 1990s~2000s 7
adv. & disadv. in outsourcing cost saving advantages access to proprietary knowledge focus on core competence flexibility competition disadvantages may lead to hollow firms high failure rates unforeseen problem may arise may damage firm s ethical image 15 Infosys Global Education Center 16 8
Infosys Infosys is an information technology Services Company headquartered in Bangalore, India Infosys has a global footprint with 65 offices and 59 development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan Pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing over 97% of the revenues come from existing customers with which Infosys has strategic long-term client relationships 17 Global Diversification 18 9
What is diversification? refers to the entering a promising new business outside of the scope of the existing business unit the new business must be attractive enough to yield consistently high returns on investment the cost of entering the new business should be low enough to allow the potential for good profitability diversification must offer potential for generating synergy between the current and the new business diversification can be justifiable if it enhances shareholder value it does so when the new business perform better under the parent firm than they would perform alone 19 Related Diversification Economies of scope-companies expand their operations beyond current markets and products, but are still operating within existing capabilities or within the existing value network Market power-using common suppliers across the businesses R&D competencies-rd provides firms with the opportunities to transfer valuable know-how from one business to another, and to combine knowledge generated in separate businesses into a single R&D center 20 10
Anheuser-Busch Inbev 21 Anheuser-Busch Inbev It is the largest global brewer with nearly 25% global market share and one of the world's top five consumer products companies With the integration of Anheuser-Busch, 45% of the company's sales come from North America AB Inbev responded to the saturated beer market demand by increasing the proportion of nonalcoholic beverages such as fruit juices, bottled water, carbonated soft drinks When it comes to beer, to increase customer loyalty by fostering global and regional beer brand 22 11
23 Google s diversification Although the vast majority of Google is search engine market, the reality is that after 10 years Google has become the largest advertising agency in the world almost all revenue comes from ads on Google s sites The source of monetization that Google found on the search market, has not yet found on other business divisions online users spend more time on Facebook than in Google, so its foray into the mobile world with Android OS, the recent Motorola acquisition 24 12
Diversification in Virgin Group 25 Diversification in Virgin Group Virgin Group Limited is a British branded conglomerate organization founded by Richard Branson. Virgin has created more than 300 branded companies worldwide, employing approximately 50,000 people, in 30 countries Global branded revenues in 2009 exceeded approx. US$18 billion The core business areas are airline, mobile, music, internet, media, weddings, hotels, leisure, food and beverage which are called the way of life brand 26 13
27 Diversification in Virgin Group In order to get business opportunities, Virgin Atlantic Airlines pioneers new rout to promote its brand exposure to millions of people Increasing brand awareness in new markets and settlement in the brand identity, it starts to find new idea appropriate for the individual market Although Branson retains complete ownership and control of the Virgin Brand, the commercial set-up of companies using it is varied and complex. Each of the companies operating under the Virgin brand is a separate entity, with Branson completely owning some and holding minority or majority stakes in others. Fall 2014 Economic Integration 14